John Larry Kelly, Jr.

John Larry Kelly, Jr. (1923–1965), was a scientist who worked at Bell Labs. He is best known for formulating the Kelly criterion, a formula to determine what proportion of wealth to risk in a sequence of positive expected value bets so as to maximize the rate of growth of wealth. [1]

He was born in Corsicana, Texas. He spent four years in the US Navy as a pilot during World War II before entering the University of Texas at Austin. He graduated with a PhD in Physics in 1953.

In 1962 Kelly created one of the most famous moments in the history of Bell Labs by using an IBM 704 computer to synthesize speech. Kelly's voice recorder synthesizer vocoder recreated the song Daisy Bell, with musical accompaniment from Max Mathews. Arthur C. Clarke of 2001: A Space Odyssey fame was coincidentally visiting friend and colleague John Pierce at the Bell Labs Murray Hill facility at the time of this remarkable speech synthesis demonstration and was so impressed that he used it in one of the climactic scenes of his novel and screenplay for 2001: A Space Odyssey,[2] where the HAL 9000 computer sings the same song as he is being put to sleep by astronaut Dave Bowman.[3]

The Las Vegas connection: Information theory and its applications to Game theory[edit]

John Kelly was a remarkable character. Apart from being a physicist he embodied certain stereotypical Texan character attributes being a tough guy, recreational gunslinger and a daredevil pilot all at the same time. He was also an associate of Claude Shannon at Bell Labs. Together they developed a Game theory type method based on the principles of information theory developed by Shannon.[4] It is reported that Shannon and his wife Betty went to Las Vegas with M.I.T. mathematician Ed Thorp, and made very successful forays in roulette and blackjack using this method, later called the Kelly criterion, making a fortune as detailed in the book Fortune's Formula by William Poundstone[5] and corroborated by the writings of Elwyn Berlekamp,[6] Kelly's research assistant in 1960 and 1962.[5] Shannon and Thorp also applied the same theory to the stock market with even better results.[7]

Over the decades, John Kelly's scientific formula has become a part of mainstream investment theory[8] and the most prominent users, well-known and successful billionaire investors Warren Buffett,[9][10]Bill Gross[11] and Jim Simons use Kelly methods. Warren Buffett met Thorp the first time in 1968. It's said that Buffett uses a form of the Kelly criterion in deciding how much money to put into various holdings. Also Elwyn Berlekamp had applied the same logical algorithm for Axcom Trading Advisors, an alternative investment management company, that he had founded. Berlekmap's company was acquired by Jim Simons and his Renaissance Technologies Corp hedge fund in 1992, whereafter its investment instruments were either subsumed into (or essentially renamed as) Renaissance's flagship Medallion Fund.